A Common Symptom of Asset Price Bubbles

28 Pages Posted: 29 May 2009

See all articles by Chung Yim Edward Yiu

Chung Yim Edward Yiu

Chinese University of Hong Kong - Department of Geography and Resource Management

Yishuang Xu

the University of Hong Kong

Coune Yajuan Cao

Department of Real Estate and Construction

Date Written: May 29, 2009

Abstract

By reviewing the previous three asset bubble implosions, viz. (1) the “Lost Decade” of Japan in the 1980s; (2) the Asian Financial Crisis in Hong Kong in 1997; and (3) the Financial Tsunami in the USA in 2008, a common symptom of negative real interest rate is very clearly revealed before the implosion of the three bubbles, although the bubbles might have been caused by very different reasons. Credit expansion causing negative interest rate has long been recognized, but many studies focused on one bubble and tried to explain it by the unique events of the bubble. In this study, a holistic framework incorporating money and credit supply and demand, risk premium and expected income growth is put forward. It provides a more complete picture of the causes of asset price bubbles. This paper found a strong and negative relationship between housing return and real interest rate in the three economies. The three bubble bursts were coincided with a period of negative interest rate. It aims to argue that, asset bubble implosion may not be prevented nor accurately predicted though, there is a clear symptom in the markets.

Keywords: Asset Bubble, Real Interest Rate, Credit Expansion

JEL Classification: E32, E44, E51

Suggested Citation

Yiu, Chung Yim Edward and XU, Yishuang and Cao, Coune Yajuan, A Common Symptom of Asset Price Bubbles (May 29, 2009). Available at SSRN: https://ssrn.com/abstract=1411587 or http://dx.doi.org/10.2139/ssrn.1411587

Chung Yim Edward Yiu (Contact Author)

Chinese University of Hong Kong - Department of Geography and Resource Management ( email )

Shatin
the New Territories
Hong Kong
Hong Kong

HOME PAGE: http://www.grm.cuhk.edu.hk/eng/people/ppl/fac_YiuEdward.html

Yishuang XU

the University of Hong Kong ( email )

room533, knowles building
the University of Hong Kong
Hong Kong, 999999
Hong Kong

Coune Yajuan Cao

Department of Real Estate and Construction ( email )

Hong Kong
China

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